Replacing your paycheck, or at least part of it, with a steady stream of dividends is a great retirement strategy.

Not only could you earn enough from your investments to live off of, but you’d probably never have to sell your holdings. That provides great downside protection, and an incredible legacy to pass on to your heirs.

The good news is that $50,000 in annual dividend income is well within reach for many investors. Better yet, it doesn’t require risky investments in high-yield dividend stocks with uncertain futures. You can build a $50,000 dividend stream just by consistently investing about $500 per month in a simple Vanguard ETF: the Vanguard High Dividend Yield ETF (VYM).

The only ETF you need to build a big dividend portfolio
The Vanguard High Dividend Yield ETF follows the FTSE High Dividend Yield Index. The stock index includes stocks forecasted to have above-average dividend yields. That means that not only do the stocks need to offer meaningful dividends right now, but there also needs to be a reasonable expectation they’ll continue to offer an above-average yield.

The biggest holdings in the Vanguard High Dividend Yield ETF are:

  • Broadcom (1.53% dividend yield)
  • JPMorgan Chase (2.36%)
  • ExxonMobil (3.13%)
  • Johnson & Johnson (3.20%)
  • Home Depot (2.58%)
  • Procter & Gamble (2.58%)
  • Merck (2.44%)
  • AbbVie (3.70%)
  • Chevron (4.06%)
  • Walmart (1.37%)

As you can see, the biggest holdings in the fund don’t offer massive dividend yields. But they do, for the most part, offer yields above the S&P 500‘s average dividend yield of 1.31%. In fact, the fund currently offers a yield of just 2.82%. Importantly, the companies in the fund should continue to support their dividend for a long time. As such, investors should expect a steady and growing income stream.

How $500 per month could generate $50,000 in annual dividends
The Vanguard High Dividend Yield ETF has historically produced a total compound annual return of 8.53% since its inception. While the returns of dividend stocks can fluctuate for any number of reasons, the historical return since its inception in 2006 is a good estimate of what to expect.

If the only thing you ever did was buy $500 worth of the ETF month in and month out and reinvest your dividends, you’d eventually find yourself with a sizable portfolio. Here’s what your account balance would look like with steady monthly returns from the ETF based on its historical rate of return.

If you can consistently invest $500 per month for 40 years, you’ll end up with a dividend income stream worth $52,731 based on the fund’s current yield. You could expect to receive that income stream every year. And if you left your principle untouched, you can expect it to keep growing and pay out an even bigger amount the next year.

There are several important caveats to consider. First, future returns aren’t guaranteed to look like past returns. Moreover, it’s extremely unlikely the fund will return the same amount for investors month in and month out. Volatility in the market ensures your end result will look somewhat different from the preceding table. Nonetheless, it’s directionally accurate and presents a reasonable expectation for investors.

Second, there’s no telling what dividend yields will look like in the future. While the fund currently yields 2.82%, that number could go up or down over the next few decades.

Finally, inflation means that $50,000 won’t have the same purchasing power in 40 years as it does today. If you’re currently spending $50,000 every year, shooting for $50,000 in annual dividends probably won’t be enough to live on in 40 years, all else being equal.

That said, the Vanguard High Dividend Yield ETF is one of the best options for building a solid portfolio of dividend stocks with practically no effort.

— Adam Levy

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Source: The Motley Fool